A Startup Founder’s Guide to Allocating Equity Grants – Techdoxx

Deepak Gupta January 11, 2022
Updated 2022/01/11 at 7:16 PM

In war for talent, equity compensation has become more important than ever, but it’s not the easiest concept to explain, especially in private equity firms.

Equity is not a new concept. Public and private companies have been using stock options (or RSUs) to recruit, motivate and retain talent for decades. However, equity compensation has grown in importance when it comes to hiring, retaining and aligning incentives for all employees, not just senior executives.

This is happening for a few reasons:

  • A global shortage of skilled tech workers: Candidates with in-demand skills are now getting multiple offers and can practically set their price. That price, more often than not these days, includes some sort of equity component.
  • Wage inflation: Labor shortages and market dynamics are causing significant wage inflation. Companies are looking for ways to increase total compensation while setting aside money. Equity is one way to do this.
  • A growing focus on private valuations: The number of companies achieving unicorn status is increasing. According to CB Insights, more than 900 companies worldwide have achieved unicorn status, and 2021 alone coined over 450 unicorns, up from the previous watermark of 111 in 2019.
  • Transparency around compensation: Compensation data is accessible. Historically, companies like Glassdoor have provided robust salary data for more mature organizations. Now companies like AngelList provide both salary and equity benchmarking for startups.
  • Expectations: More than half (53%) of millennials say equity compensation was the main reason or one of the main reasons they took the job.

Leaders need to better understand and articulate not only why equity matters, but also how it is determined. So let’s start from the beginning.

An ownership mindset is good for both business and morale, which is why many founders choose to allocate some level of equity (even a small portion) in addition to leadership roles. Leaders may have the vision, but they need a team to execute and realize their ideas.

Think strategically, think ahead and communicate – make sure you’re delivering the right capital allocation, for the right strategic reasons, and to achieve the right goals.

Designing your stock program

After deciding that stock options will be a component of your total rewards package, it’s time to define your philosophy and design your action program.

Sizing the stock pool

First, you will need to determine the size of your employee choice pool. You should formulate your thoughts before discussions with investors, which may require creating a larger than necessary pool of options if the proposed pool is disconnected from your contracting plan.

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